State-Owned Banks Cut Profit Expectations for 2013

Four of the five state-owned banks have reduced their expectation for this year's profit growth, as banking reform continues and regulators keep a firm grip on credit supplies.

Only Agricultural Bank of China, the last of the five to list publicly, expects profit to grow at levels comparable with previous years because of a smaller base, executives from the five banks said in a recent industry meeting.

The other three of Big Four banks plus the Bank of Communications all anticipated profit growth to slow to a single-digit rate this year from an estimated level of 10 to 14 percent for 2012.

There is no consensus over how much profit banks should be able to make. Some said the predicted decline is natural under market reforms. But two bank executives said a healthy profit growth rate should be around 15 percent, or roughly the same as the GDP growth rate when inflation and other nominal appreciation of assets are excluded.

Lower profit expectations partly reflect bankers' concern with the central bank's agenda on this year's credit supply. Sources close to the regulator said it would cap bank loans at 9 trillion yuan for the year.

The figure increased by 800 billion yuan from last year, but is still likely to be well short of the scale banks would need to offset the loss from lower profit margins.

Bank executive at the conference said they expect narrowing interest spreads to weigh substantively on their profits.

"Banks would still rely on interest spreads for an extended period of time, but their profitability would inevitably fall," an executive at a large bank's corporate banking department said.

The decline was mainly a result of last year's interest rate changes, which adjusted the floating ranges of deposit and lending interest rates and limited banks' pricing power over capital. The cost of capital rose also because many customers opted for better-paying wealth management products over ordinary savings accounts.

All those changes have brought impacts that are yet to be fully absorbed by the market, another executive at a large bank said. Some analysts echoed his view in predicting that bank interest spreads would continue shrinking this year, but the changes would be small.

They said that banks' net interest spreads in 2013 would be only a few basis points lower than 2012's estimated levels of between 2.5 and 2.7 percent.

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Bank managers at the meeting also expected the expansion of bank intermediary services to slow significantly after tougher regulations were introduced in 2012. Single-digit rates are likely for profit growth, compared with 30 to 50 percent year-on-year increases common in previous years.

However, a few analysts said that some banks may have been better prepared than others for bad times because they set aside more capital than required during boom cycles to cushion against lending losses. That extra money can be used to enhance profit with slight maneuvering with how loans are classified.

Banks have much leeway categorizing their loans based on the likelihood of default under the broader regulatory framework. Relaxing requirements a bit means freeing up a certain amount of capital locked in bad-debt reserves.

The central bank would keep using reserve requirement-ratios to regulate bank loans, an official from the bank said.